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This paper demonstrates the important role of job displacement in the household bankruptcy decision. The author develops a dynamic, forward-looking model of unemployment and bankruptcy where persistent negative income shocks increase a household's likelihood of ling for bankruptcy both immediately and in the future. Consistent with the model's predictions, it's found that households in the NLSY are 2.5 times more likely to file for bankruptcy in the year immediately following a job loss, at a rate of an additional 10 bankruptcies per 1000 job losses.
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